Limitation Periods for Demand Mortgages
The BC Court of Appeal has pronounced a new decision which lenders in BC and their lawyers will want to be aware of in Leatherman v. 0969708 BC Ltd. et al, 2018 BCCA 33. This decision represents a significant development in the area of foreclosure law and enforcement of security.
The Leatherman case involved a demand mortgage meaning that the “balance due date”, or the date that the full balance of the funds loaned and secured by the mortgage was due, was on demand. Until the demand was made by the mortgagees, the mortgagors were obliged to make an annual payment of the accrued interest. The “maturity date” was defined in the mortgage as the balance due date shown on the mortgage form (i.e. on demand), or any earlier date on which the mortgagees could lawfully require payment of the mortgage money. The mortgagor first failed to make an interest payment in October of 2013 and continued to fail to make the required interest payments in the subsequent years. The parties exchanged correspondence in relation to the debt and its repayment in November of 2015. The mortgagees made formal demand for payment of the principal and interest due under the mortgage on November 9, 2016 and filed a petition for foreclosure in December of 2016.
The mortgagors responded to the foreclosure petition by arguing that the foreclosure was statute barred because the two-year limitation period commenced on November 1, 2013 when the mortgagors first failed to make a required interest payment. The mortgagees argued that the triggering event for the limitation period was the failure of the mortgagors to comply with the demand for payment made on November 9, 2016.
The relevant provisions of the Limitation Act in BC are as follows:
“Discovery rule for claims for demand obligations
- A claim for a demand obligation is discovered on the first day that there is a failure to perform the obligation after a demand for the performance has been made.
Discovery rule for claims to realize or redeem security
- A claim to realize or redeem security is discovered on the first day that the right to enforce the security arises.”
The Court of Appeal held that the mere insertion of the term “payable on demand” does not render a mortgage a “demand obligation”. The Court elaborated that the agreement in question included both a demand obligation and a contingent obligation. Specifically, the Court held that the covenant to pay the principal, considered on its face and alone, was a demand obligation to which section 14 of the Limitation Act applied. In other words, the principal balance of the mortgage was not payable until demand. However, the obligation to pay interest was not a demand obligation because it was payable without demand on October 31 of each year. In addition, the mortgage provided that the mortgaged property was security for the debt, such that section 15 of the Limitation Act applied and the right to realize on the security arose upon discovery of that right. Discovery of that right arose upon default, namely when an interest payment was not made under the mortgage.
Essentially, the Court of Appeal held that the limitation period for realizing on the security over the property arose upon the mortgagors’ default by the failure to pay interest, and that the limitation period would expire two years after that default, unless the limitation period was postponed. Two ways that a limitation period for a debt can be postponed include the debtors (a) signing an acknowledgement of the debt in writing or (b) making a payment. However, the Court of Appeal also held that the limitation period as it relates to the debtors’ unsecured promise to repay the principal portion of the loan only started upon demand, except to the extent of the interest payable more than two years prior to the commencement of the foreclosure proceeding.
In light of the decision of the Court of Appeal in Leatherman, lenders need to be aware of the different starting points for limitation periods to enforce obligations arising under a demand loan secured by a mortgage and a personal promise to pay. If you are a lender that becomes aware of a default under a demand loan, you should contact your legal advisor to discuss the issue of limitation periods for enforcing your debt claim.